A Victory for College Students – Student Loan Rates Remain Low for Now

Until June 29th, a big problem was brewing for college students but less than two days before the deadline, Congress agreed on a bill that would avert larger student loan payments for some students.

The cost of college rises at roughly twice the rate of inflation each year. This equates to nearly 6% annually and that has made college tuition out of reach of the majority of families that didn’t save for education costs. Because of that, most students now rely on grants and loans to pay the costs. Grants quickly run out for most leaving student loans as their only option.

The federal government helps by offering two types of loans, called Stafford loans.
The unsubsidized loans offer an interest rate of 6.8% and don’t require students to start making payments on the loans until they graduate although interest continues to add up while they’re in school.

The subsidized Stafford loan has two advantages: First, the interest rate is cut in half giving students a rate of 3.4% and second, the Federal government pays the interest on the loans while the student is still enrolled.

When the Democratic Congress took over in 2007, they lowered the rate on subsidized student loans dropping the rate to a low of 3.4% but that legislation was due to expire on July 1st, 2012. This would have restored the original 6.8% interest rate causing students to pay hundreds of dollars more each year.

With unemployment reaching 14% for those 20-24 years old, the two presidential candidates, along with Congress, knew that allowing interest rates to double would be unpopular.

Both sides of the aisle agreed that the rate should remain at 3.4% but the Republicans wouldn’t approve a bill without finding a way to pay the $6 billion price tag that comes with it.

A Transportation Bill

For now, student loans rates remain low. But for how long can they remain so low?

On June 29th, Congress voted to extend the subsidized Stafford loan interest rate of 3.4% for an additional year.

The legislation appeared in a transportation bill that appropriated funds to continue the maintenance of roads and bridges through July 6th while a more permanent bill is completed. Additionally, the bill extends the Federal Flood Insurance program that protects families against floods. The $6 billion to fund the cost that comes with the extension of the lower interest rate will come from changes in how companies fund pension programs.

The new student loan provisions are only temporary measures. The extension is set to expire on July 1st of 2013 making it a necessity that Congress take up the issue again next year. Yes, we’ll have to go through this again in a year.

With the student loan delinquency rate now at 14.6% and a large number of college graduates unemployed, both political parties knew that allowing the rate to increase would place further pressure on college graduates still looking for a job.

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Still, the rate will eventually have to go up. Or we’ll have to admit that we want the government to subsidize loan rates for students (not necessarily bad but a discussion for another day). Either way student loan debt is quickly turning into a bubble which, if burst, will seriously set back our economy.

For now students win. Hopefully those getting loans under this still low rate choose their degrees wisely and are able to pay back their student loans.

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Glen Craig is married and the father to four children that he spends the day chasing as a stay-at-home-dad. He took an interest in personal finance when he realized most of his paycheck was going toward credit card bills. Since then he's eliminated his credit card debt and started on a journey towards financial freedom.

Intelligent people that can create is what our economy needs. If lower student rates can help that then that’s a good thing. Hopefully all students are intelligent with their loans though and aren’t getting set up for a mountain of debt, even with low rates.

My daughter is about to graduate from college with no debt – she never borrowed a cent. She worked cleaning offices with the rest of our family. Next year she’ll be going to England for several months – all of this with money she’s earned cleaning offices. I’m a big proponent of starting your own office cleaning to pay off debt, fund college, retire early, etc.

I do not see anything wrong with availing of student loans to be able to finish college. However, wouldn’t it be better if we start saving up for our children’s college education while they are still young? I would, of course, help my children raise the money they need to have a good college education while teaching them financial responsibilities and working to earn money for themselves.

With about one-half of all students who start college NOT finishing, with student loan defaults at 14.6%, and 80% percent of graduates NOT working in their degree area within 3 years of graduation, are you sure student loans are a good idea?

I don’t see the loan interest issues as big of a problem as the tuition inflation issue. It seems that time in congress would be better served figuring that beast out. Stemming the rate of tuition inflation would be a far bigger boon than lowering interest rates.

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